In a letter to the PCAOB, Senator Charles Schumer called on the PCAOB to discipline Chinese accounting firms that continue to resist independent regulatory inspections. The letter expressed the Senator’s concern about the PCAOB’s ``continued failure’’ to inspect Chinese audit firms. Noting that close to 100 Chinese auditors, or China-based affiliates of U.S. auditors, have registered with the Board to perform audit work for over 300 U.S. public companies with operations in China, Senator Schumer said that the Board’s failure to inspect means that investors have no independent assurance that Chinese accounting firms’ audits on U.S. public companies’ operations in China comply with U.S. law. The Banking Committee member called this a serious problem that threatens to undermine public confidence in the companies’ financial statements, which is critical to confidence in the markets. In a separate letter, Senator Schumer asked the SEC to require upfront disclosure by public companies that use China-based audit firms.

Senator Schumer agreed with PCAOB Chair James Doty that it is not tenable to continue indefinitely to allow Chinese audit firms to remain registered if the PCAOB cannot inspect their U.S.-related audit work. Six years with no resolution on this critical issue is unacceptable, emphasized the Senator, and it is time for the Board to exercise its enforcement authority against Chinese audit firms that have not submitted to independent regulatory review.

Despite six years of Chinese audit firms’ refusals to cooperate in inspections, he noted, the Board has taken no disciplinary actions with respect to any of those firms. While he recognizes that the Chinese government is acting to obstruct the Board’s inspection of registered Chinese audit firms, the Senator said that this standoff has gone on long enough. He urged the Board to take immediate disciplinary actions against Chinese audit firms that continue to refuse to cooperate. In a two-month span earlier this year, he observed, more than 24 companies doing business in China reported auditor resignations and accounting irregularities.

Moreover, the Board itself has expressed concern about the danger that the lack of inspection of Chinese audit firms poses for U.S. investors. The Board has listed the Chinese auditors that have never been inspected, along with the names of their client companies, and issued an audit alert to remind registered audit firms of their obligations. The alert appears to have been prompted by the increasing numbers of companies based in China and Hong Kong accessing the U.S. markets via reverse mergers. In the Senator’s view, these recent reverse merger scandals are a case-in-point that failure to scrutinize Chinese audits can cost U.S. investors billions.

The Board was not created to merely alert the public to problems, emphasized the Senator, rather the Board was set up as a watchdog to protect investors, to inspect and assess compliance with applicable securities laws to protect the interests of investors, and to further the public interest in the preparation of accurate audit reports.

To ensure corporate financial statements are subject to tough, outside scrutiny, said the Senator, Congress authorized the Board to take disciplinary action if auditors refuse to cooperate in inspections. Those sanctions include suspending or revoking an audit firm’s registration, he said, which would preclude the firm from preparing or issuing any audit reports concerning any issuer. Despite this enforcement authority, and despite six years of Chinese audit firms’ refusals to cooperate in inspections, the Board has taken no disciplinary actions on any Chinese auditors, noted Senator Schumer, who added that he was troubled by the Board’s failure to do what it was created to do, particularly in the face of Chinese corporate accounting scandals that have already cost U.S. investors billions.